“The impact of globalization on income

inequality in developing countries”

Abstract

This study considers how education and globalization affect income inequality in Asia, with
unbalanced panel data. However, when more variables are integrated into the model, the consistency
of the inverse U-shaped curve becomes weaker. The empirical results suggest that educational
variables are highly influential in affecting income distribution. Our analysis indicates that a higher
level of education achieved by the population aged 15 and over has improved income distribution in
Asia, while educational inequality, measured by the education Gini index, has a negative effect on
income distribution. Higher levels of globalization are correlated with higher levels of income
inequality, while freedom, either political or economic, has marginal effects on the level of inequity in
income distribution.

CHAPTER 1
INTRODUCTION

Introduction

Globalization has made the globe more equal. As the communication around the world
become cheaper and transportation gets faster, developing countries have a chance to reduce the gap
with the rich countries. But story is opposite in many developing countries which experiences an
extremely high level of income inequality (World Economic and Social Survey 2013).

Globalization is considered to be a multidimensional phenomenon, which include

different aspects of political, social, cultural and economic sphere but the major concern of
economists and policy makers is economic globalization and its impact on the income of the people
(Ogunyomi et al., 2007). Economic globalization is a process of rapid increase in the liberalization of
international trade, investment, finance, and technological changes among countries (Torres, 2001).
The impact of globalization is not evenly distributed among all segments of the society, especially the
effect of globalization on employment and income. It is widely accepted that increase in globalization
is associated with rising income inequality in the world. A combined income of 500 richest
individuals in the world are greater than 2.5 billion poor people (Watkins et al., 2005).

Globalization has been perceived by both anti-globalist commentators and pro-globalist

commentators. The anti-globalist commentators (Stiglitz, 2003) argued that globalization has adverse
effects on particularly poor economies due to the increase in within or between countries income
inequality and there is a need for government intervention to control the adverse effect of
globalization on income. While the pro-globalist commentators (Roud and Whalley, 2004; Bhagwati,
2004) argued that increase in income inequality due to globalization is a reasonable price to pay for
the benefits of world integration and generally it leads to reduce poverty and creating employment.
Therefore, there are challenges that whether globalization lead towards rising income inequality or
dampening income inequality

Objective of the Study.

The objective of the study is to analyze the impact of globalization on income

inequality in selected Asian economies. The study has following specific objectives: to analyze the
relationship between trade globalization and income inequality, to analyze the relationship between
financial globalization and income inequality, to analyze the relationship between technological
globalization and income inequality. This study will provide useful guidelines to the policy makers
and government to make effective policies in relation to globalization and income inequality that lead
towards economic growth and reducing income inequality. The existing literature focused mostly on
the one aspect of globalization (i.e. international trade) but this study contributes to the existing
literature by examining three different aspects of globalization (i.e. trade globalization, financial
globalization and technological globalization) through which income inequality is affecting Asian
economies.

CHAPTER 2
RELATED LITERATURE

Related Literature

Theoretically and empirically globalization play an important role in the development

of the countries. There are several dimensions on the relationship between globalization and income
inequality that has been investigated by researchers.

The literature on trade globalization and its relationship with income inequality is a
matter of controversies among researcher. On one hand trade globalization increase income inequality
while on the other it reduce income inequality. Therefore, the literature on trade globalization is
further divided into two sub section. The first sub section discuss a positive impact of trade on income
inequality whereas the other sub section discuss a negative literature on the relationship between trade
and income inequality.

Silva and Leichenko (2004) examined the impact of foreign trade on income
inequality in different states of U.S. The study used Panel data from 1972 to 1994 by using OLS for
estimation. The results of the study suggested that expensive imports and cheaper exports worsening
the condition of income inequality in different states of United Nations.

Beckfield (2006) investigated the relationship between national income inequality and
regional integration. Unbalanced panel data for 12 European countries from 1973 to 1997 were used.
Study employed generalized least squares, fixed and random effects methodologies. Results showed
that in all the three estimation techniques economic integration positively related with gini coefficient.
The study concluded that the increase in regional economic integration among European countries
raise income inequality. Ali and Isse (2007) investigated the effect of foreign aid and trade openness
on income distribution. Study used panel data for 150 countries from 1975 to 2000. The study used
simultaneous equations system and utilized the methodology of three-stage least squares. Results
indicated that there exist positive and significant association between international trade and GDP per
worker while government spending and foreign direct investment negatively affect income. They
concluded that trade and foreign aid are solid determinants of gdp per capita and international trade
appears complementary to economic performance. Meschi and Vivarelli (2007) analyzed the
association between international trade and within-co.

Demir et al. (2012) examined the association between trade structure, sectoral
employment and income inequality in the developing economies. Unbalanced panel data of fifty five
developing countries from 1981 to 2005 were utilized by employing IV-GMM and two-stages least
square (2SLS) for estimation. Results of the study showed that trade structure and employment are
significantly positive suggesting that rise in the share of manufactures exports and industrial
employment increase income inequality. The study concluded that different trade structure
significantly increase income inequality.

Chakrabarti (2000) explored the impact of intra-national distribution of income and

international trade. Study used data of low-income, lower middle-income, higher middle-income and
highincome countries with the total of 73 countries for the year 1985. Study employed OLS and IV
for estimation. The finding of the study showed that income inequality reduces by greater
participation in international trade and growth which offers a channel through which international
trade reduce the distribution of income inequality. Silva (2007) examined the impact of export and
domestically oriented agricultural trade on income inequality across the developed southern region
and the less developed northern regions of Mozambique. The study used cross sectional data from
1996 to 2000 by utilizing ordinary least square. The results of the study found that the domestic
oriented agricultural trade has inequality increasing effect in southern Mozambique. Whereas the
international orientated crops export has inequality dampening effect in northern Mozambique.

The issue of globalization and its relationship with income inequality has gained much importance
in the past few years in both developed and developing countries. Policy makers also remained
interested in analyzing the relationship between them. A wide-ranging literature has discussed the
impact of globalization as international trade on income inequality in both
developed and developing countries. Few studies also discussed the relationship between financial
globalization and income inequality. But there are comparatively limited studies on the impact of
technological globalization on income inequality especially for Asian developing countries.

CHAPTER 3
METHODOLOGY

Methodology

The study has three econometric models which are based on the impact of globalization on
income inequality. All three models use income inequality as dependent variable. And a number of
explanatory variables are introduced according to the model. The first model is developed to measure
the relationship between trade globalization and income inequality. The second econometric model is
constructed to assess the relationship between financial globalization and income inequality while the
third model aimed to investigate the effect of technological globalization on income inequality. The
study used pooled OLS and IVLS estimation techniques as methodology.

Research analysis

Another interesting result to observe is the inverse relationship between education index and
inequality. Though, education was used as a control variable, yet its estimate provides some very
intuitive results. It suggests that, over the period of history for the target group of countries, there has
been a negative causation between education and income inequality, meaning thereby, an increase in
the level of education is bound to reduce the income gap between the rich and the poor. However,
fixed effects estimator suggests that education is an insignificant indicator of income distribution.

Result shows that the impact of education on income inequality is negative and significant reducing
the gap between rich and poor. As the study analyze the developing countries of Asia, where acquiring
education is difficult for poor people, because poor people have more children than the rich.
Therefore, the poor remain less educated and have less employment opportunities than the rich, so
income inequality persists. Rudra (2004), Lee (2014), Demir et al. (2012), Cassette et al. (2012),
Meschi and Vivarelli (2009) and Jaumotte et al. (2008) also found the inverse and significant impact
of education and income inequality. Foreign direct investment and income inequality indicates the
existence of positive and significant relationship. This result suggests that FDI contribute towards
increasing income inequality and mostly benefiting the high skill workers. The impact of positive and
significant relationship between FDI and income inequality is also found by Tian et al. (2008),
Reuveny and li (2003), Cassette et al. (2012) and Jaumotte et al. (2008).

CHAPTER 4
FINDINGS AND CONCLUSION

Findings

Regardless of the magnitude of coefficients, their signs provide some very surprising results. It is
interesting to observe that the coefficient of KOF Index, indicator for globalization, is not only
positively related to Gini coefficient in all four models, but also highly significant in each model. This
result corroborates the hypothesis of this study which suggests that an increase in globalization,
ceteris paribus, leads to a certain incline in inequality in the target group of countries. This result can
be interpreted in a more instinctive way by relating the results to Table 1, which proposed that income
inequality is on the rise in most countries even if there is an incline in their respective index for
globalization.

Conclusion

The causal effect of globalization on income inequality has been an issue of significant interest in
development economics. Various studies in this issue have yielded conflicting results. This paper lays
its focus on more recent literature, more specifically the results presented in Zhou et al. (2011) that
suggest existence of an inverse relationship between globalization and income inequality. However,
this paper has identified several limitations in their analysis; most notably the fact that their study is
based on a cross sectional data, while globalization and income inequality are matters pertaining
significantly to variations over time.

Therefore, while this analysis does not provide definitive proof of the impact of globalization
and income inequality, it underscores the variety of results obtained regarding this issue. This would
suggest that perhaps a simple, overarching relationship does not exist. Rather it is possible that the
impact of globalization on income distribution varies between nations, depending on the structures
and institutions that are in place in each country.
CHAPTER 5
RECOMMENDATION and REFERENCES

Recommendation
The researchers will be able to do the following recommendation or focused on the the specific
recommendations were be able to take .

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